In this article, we present a history-friendly model of the changing vertical scope
of computer firms during the evolution of the computer and semiconductor
industries. The model is “history-friendly,” in that it attempts at replicating some
basic, stylized qualitative features of the evolution of vertical integration on the
basis of the causal mechanisms and processes, which we believe can explain
the history. These factors are identified in the coevolution of capabilities, the size
of markets, and the structure of industries. In particular, the basic assumption
is that the principal force behind the patterns of vertical integration and
disintegration of computer firms was the differential development of capabilities
for designing and producing semiconductors among firms. On this basis,
the changing boundaries of firms are analyzed in the context of dynamic and
uncertain technological and market environments, characterized by periods of
technological revolutions punctuating periods of relative technological stability
and smooth technical progress. The model illustrates how the patterns of vertical
integration and specialization in the computer industry change as a function of
the evolving levels and distribution of firms’ capabilities over time and how
they depend on the coevolution of the upstream and downstream sectors.
Specific conditions in each of these markets—the size of the external market,
the magnitude of the technological discontinuities, the lock-in effects in
demand—exert critical effects and feedbacks on market structure and on the
vertical scope of firms as time goes by.

In this article, we present a history-friendly model of the changing vertical scope
of computer firms during the evolution of the computer and semiconductor
industries. The model is “history-friendly,” in that it attempts at replicating some
basic, stylized qualitative features of the evolution of vertical integration on the
basis of the causal mechanisms and processes, which we believe can explain
the history. These factors are identified in the coevolution of capabilities, the size
of markets, and the structure of industries. In particular, the basic assumption
is that the principal force behind the patterns of vertical integration and
disintegration of computer firms was the differential development of capabilities
for designing and producing semiconductors among firms. On this basis,
the changing boundaries of firms are analyzed in the context of dynamic and
uncertain technological and market environments, characterized by periods of
technological revolutions punctuating periods of relative technological stability
and smooth technical progress. The model illustrates how the patterns of vertical
integration and specialization in the computer industry change as a function of
the evolving levels and distribution of firms’ capabilities over time and how
they depend on the coevolution of the upstream and downstream sectors.
Specific conditions in each of these markets—the size of the external market,
the magnitude of the technological discontinuities, the lock-in effects in
demand—exert critical effects and feedbacks on market structure and on the
vertical scope of firms as time goes by.